IDNLearn.com is the perfect place to get answers, share knowledge, and learn new things. Join our community to access reliable and comprehensive responses to your questions from experienced professionals.

What is the maximum amount a firm should pay for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%

Sagot :

Answer:

$56,861.80  

Explanation:

The maximum price an investor would pay an investment today is the present value of the investment's future cash flows discounted by the opportunity cost of capital of 10%.

Present value of a future cash flow=future cash flow/(1+cost of capital)^n

n refers to the period in which the cash flow is expected , for instance,for year 1 cash flow n is 1, 2 for year 2 and so on.

PV=$15,000/(1+10%)^1+$15,000/(1+10%)^2+$15,000/(1+10%)^3+$15,000/(1+10%)^4+$15,000/(1+10%)^5

PV=$56,861.80